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. Last Updated: 07/27/2016

Moving Past the Lenin Index

Since 1992, the Russian government has felt bound to cast spells and dance ritual dances in order to attract foreign investors. They have set up and reorganized government departments responsible for cultivating potential investors. At first there was the Committee for Foreign Investment in the form of an independent ministry, then under the aegis of the Economics Ministry. To this day its first director, Leonid Grigoriyev, continues to work in the Russian management of the World Bank. Later on, the functions of following and enticing foreign investment were transferred to a specially created Agency for International Cooperation and Development. Not to mention the quasi-governmental Privatization Support Fund (under Vladimir Shcherbakov), the Russian Financial Corporation (Andrei Nechayev) and the State Investment Corporation (Yury Petrov).


Interestingly, real progress in attracting outside investment began only after all these special departments were disbanded and the quasi-government bodies moved into businesses that usually had nothing to do with attracting investment.


The political realities of Russian life have always brought us back to earth. We have always told ourselves and each other that there can be no foreign investment with the level of political instability that exists in Russia. We'll wait for the elections -- God forbid the Communists should win -- then things will pick up and growth will begin. Several times in the run-up to the presidential elections the corporate securities market made some serious jumps, somebody made good money and the uninitiated would say every time, "There it is, it's begun." However, after what was a fortunate outcome in the elections for intelligent people, sluggish investors came up with another qualification -- the president is in poor health and because of this it is unclear what will happen with this country. Periodically, unsubstantiated rumors make their way through world financial markets that Yeltsin is in a bad way or has died, and someone makes a lot of money.


However, in terms of serious investors, it's worth bringing a few recent events to light. Undoubtedly the most important of these is that Russian debt bonds have finally obtained a rating by international agencies. Now investors do not have to base their decisions on rumors, but can take advantage of competent opinions when appraising Russia's markets. The government is satisfied despite the fact that Russian securities received a rating of speculative rather than investment quality. BB- is still better than no rating at all.


It is worth adding that at the annual conference on investment issues in developing countries held in New York at the beginning of October, investment into Russia was the first issue discussed. The Russian part of the hearing was organized by Renaissance Capital, one of the leaders on Russia's stock market. At the invitation of Renaissance, Central Bank Chairman Sergei Dubinin also addressed the New York conference. His presence alone underlined the importance of attracting immediate investment into Russia's economy. The main idea in his address was probably that Russia has already completed a revolution in macro-economic policy and that there will be no innovations in this area. All that remains is to take care of the imperfections, which, although many, are not fatal.


Renaissance Capital's managers, and above all Boris Jordan, added during the Russian part of the conference that the second financial revolution -- a shareholder's revolution -- still lies in the future. They meant that fundamental changes will have to occur in the management of businesses. The absolute power of red directors must be handed over to shareholders in order to guarantee a real influx of big money into Russian industry. The laws are already partly in place but they are still not observed. Renaissance's Lenin Index has fallen from 95 percent four years ago to its current level of 4 percent. The Lenin Index charts the number of portraits of Lenin hanging in the hundreds of directors' offices at enterprises in the Russian hinterlands. The index is first of all clever, but it is also a true indication that a shift in the consciousness of Russian managers is taking place.


What else truly distinguishes the current investment climate in Russia from 1992 and subsequent years? A market infrastructure has been created from practically nothing. Several Russian companies have already issued American Depositary Receipts. Uneximbank has attained the status of authorized depositary from several Western banks. In the very near future, the cellular phone network of Vympelkom's stock will begin to be traded on the New York Stock Exchange. Gas giant Gazprom's shares have begun to be placed in the West. Investors appraise Gazprom's perspectives as very good. Lastly, Russian Eurobonds are supposed to begin issue by November.


Before, foreign investors who wanted to buy a little Russian risk had only one opportunity for investing their capital -- to import equipment and other investment goods, organize production and wait for revenues. Now there are standard investment instruments at investors' disposal: Stocks, depositary receipts, corporate and state bonds. This is putting an end to the concept that the most important thing in Russia is not a "return on capital" but a "return of capital." The typical foreign investor keeps a close track of revenues and painfully winces at every reduction in interest rates.


The country's leadership is also changing its approach to the issue of foreign investment. It is becoming rarer to hear groundless entreaties that foreign investors will save domestic industry. The economy is in need of investment and it is evident to everyone. Decision-makers on both sides of the border understand that investing money is not an act of charity, but a commercial affair -- that is, a means of doing business. Russia is offering rare goods: the opportunity for high-yield investments with understood risks. The first buyers to recognize the value of this good will clearly have an advantage over those that follow.